Leaving the UK without a replacement Free Trade Agreement (FTA) in place may lead to significant export losses reaching £30 billion for British companies, according to global trade credit insurer Euler Hermes.
Its latest Economic Insight ‘Brexit Me If You Can‘ sets out three scenarios to assess the impact of the UK leaving the European Union. The core scenario suggests the UK is most likely to remain within the EU, minimising disruption to trade with its 500 million strong customer base and allowing exports to continue to grow by as much as £26bn by 2019.
However, if the UK leaves the Union with a new FTA with the Single Market and all of its global trading partners in place, turnover growth would be halved. In the worse case scenario with no replacement FTA, there would likely be a sharp contraction in the UK economy.
The turnover of British companies could contract by 1% per year on average, compared to the current predicted growth of 4% on average after 2017. The report identifies direct export losses, falling margins due to higher import and financing costs, and divestment of Foreign Direct Investment (FDI) as the three main factors in the contraction.
Euler Hermes estimates that a Brexit without an FTA could result in losses of of up to £30bn or 8% of country’s total good exports, a gap which, even when offset by trade with Commonwealth countries, would take at least 10 years to fill. Under this worst case scenario, the trade balance deficit – already at a record high – would widen by £35bn within 12 months.
Ana Boata, European economist at Euler Hermes, said: “A collapse in exports, high import bills and financing costs and a rush of divestment could cause a perfect storm for the UK economy in the event of [a] Brexit.
“While some of the risk could be mitigated if a Free Trade Agreement were to be agreed during exit negotiations, our forecasts paint a dismal picture for British businesses in a would outside of the EU.”
The report finds that 60% of the UK loss in goods exports would come from four main markets – Germany, the Netherlands, France and Ireland. Businesses operating in sectors where the dependency on the European market is significant, such as chemicals, machinery, equipment, automotive, textile, energy and agriculture, would be hit hardest.
With 55% of imports coming from the EU, a Brexit without an FTA would also be likely to hit profit margins for UK companies through the depreciation of the pound and the introduction of new import tariffs, either from the EU or by the UK in the aim of increasing local production.
Financing costs would also rise as UK-based banks lose their ability to secure competitive funding from the European Central Bank, while the Bank of England might be forced to raise interest rates to fight the falling value of the Sterling, regardless of whether or not an FTA is signed.
Ms Boata added: “Without access to the Single Market, Foreign Direct Investment inflows are also likely to be significantly lower, as foreign companies will benefit less from relocating or expanding into the UK. Overall, we predict that roughly £210bn in investment would be lost during the four years following the referendum, in the worst case scenario.”
‘UK can thrive’
Separately, chief executive of money broker ICAP Michael Spencer has told the BBC that the UK “can thrive” outside the European Union.
Mr Spencer admitted that there are “pros” to staying within the Union, but said in an interview with the BBC: “Yes we can thrive. The UK is the fifth largest economy in the world, it’s absolutely an economic leader in many aspects.”
Conservative treasurer until 2010, and current Tory donor, the ICAP boss said that he hasn’t yet decided how he will vote in the in-out referendum. Prime Minister David Cameron has said he call for the UK to remain in the EU, if his reform negotiations are successful.